U.S. crude oil production to reach record high in 2018

In EIA's latest Short-Term Energy Outlook (STEO), U.S. crude oil production is forecast to average 9.3 million barrels per day (b/d) in 2017, up 0.5 million b/d from 2016. In 2018, crude oil production may reach an average of 9.9 million b/d, which would surpass the record of 9.6 million b/d set in 1970. EIA forecasts most of the growth through the end of 2018 will come from tight rock formations within the Permian region in Texas and from the Gulf of Mexico (GOM).

In the July STEO, the Permian region is expected to produce 2.9 million b/d of crude oil by the end of 2018, about 0.5 million b/d more than the estimated June 2017 production level, representing nearly 30 percent of total U.S. crude oil production in 2018. The Permian region covers 53 million acres in the Permian Basin of western Texas and southeastern New Mexico.

With the large geographic area of the Permian region and stacked plays, operators can continue to drill through several tight oil layers and increase production even with sustained West Texas Intermediate (WTI) crude oil prices below $50 per barrel. EIA forecasts the Permian's rig count will fall from 366 to 345 at the end of 2017 and then grow to 370 by the end of 2018.

In addition to responding to changes in WTI price, increases in rig counts are also related to cash flow. In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity and increased hedging activity by producers, many of whom have sold future production at prices higher than $50 per barrel. Available cash flows could potentially contribute to the growth of rigs in this region despite relatively flat crude oil prices since December 2016.

EIA's Drilling Productivity Report indicates productivity in the Permian, as measured by new-well oil production per rig in barrels per day, decreased for the 10th consecutive month in June. Output per rig is likely decreasing because operators are drilling more wells than they are completing.

The trend of operators drilling more wells than they are completing does not have a clear cause, but a widening of the WTI-Midland crude oil price discount to WTI-Cushing since early 2017 suggests the possibility of some minor transportation constraints. Lags in well completion may also reflect the implementation of strategies that drill more wells from a single pad, with completion equipment not deployed until all wells are drilled.

Average output per well shows productivity continues to increase in the Permian region. Initial production based on average output per well year-to-date is higher than the 2016 annual average. Many operators are continuing to experiment with completion techniques to maximize output per well, suggesting the 2017 annual average initial production rate could continue to increase.

In 2016, eight projects came on line in the GOM, contributing to production growth. Another seven projects are anticipated to come on line by the end of 2018.

Based on anticipated production at both new and existing fields, crude oil production in the GOM is expected to increase to an average of 1.7 million b/d in 2017 and 1.9 million b/d in 2018.